Euro Outlook Turns Increasingly Bearish Amid Central Bank Rift

DailyFX

Aug. 20, 2012, 8:45 AM

Market sentiment waned on Monday amid the growing rift with the euro-area, and the drop in risk-taking behavior may gather pace throughout the North American trade as the heightening threat for contagion continues to drag on investor confidence.

Talking Points

Euro: Bundesbank Opposes Unlimited Bond Purchases, All Eyes On Draghi

British Pound: Maintains Narrow Range, Continues To Eye 100-Day SMA

U.S. Dollar: Benefits From Flight To Safety, Rally To Gather Pace

Euro: Bundesbank Opposes Unlimited Bond Purchases, All Eyes On Draghi

The Euro slipped to 1.2294 as the Bundesbank argued against an unlimited bond purchase program to cap borrowing costs across the periphery countries, while a spokesman for the European Central Bank announced that plans to target the yield curve has 'not yet been discussed' by the Governing Council as President Mario Draghi increases his pledge to address the debt crisis. As the governments operating under the monetary union become increasingly reliant on monetary policy, we may see a growing rift within the ECB, and the central bank may attempt to buy more time at the next rate decision scheduled for September 6 as the non-standard measure comes under increased scrutiny.

According to Credit Suisse overnight index swaps, market participants are now pricing an 11% chance for a 25bp rate cut in September, and we may see the ECB preserve its current policy next month as they wait for Germany's high court to approve the European Stability Mechanism. As European policy makers maintain a reactionary approach in tackling the debt crisis, we will maintain our bearish forecast for the EURUSD, and the pair looks poised to give back the rebound from July (1.2041) as the fundamental outlook for the region turns increasingly bleak. As the EURUSD struggles to put in a close above the 50-Day SMA (1.2375), we should see the pair continue to carve out a lower top in August, and we anticipate to see fresh yearly lows in the exchange rate as the downward trend from 2011 continues to take shape.

British Pound: Maintains Narrow Range, Continues To Eye 100-Day SMA

The British Pound bounced back from an overnight low of 1.5676 to maintain the range from the previous week, but the series of higher highs paired with higher lows continue to encourage a bullish outlook for the GBPUSD as it appears to be carving out an upward trend. As the economic docket on tap for the this week is expected to instill an improved outlook for the U.K., a slew of positive developments should help to prop up the pound-dollar, and we may see the pair finally push above the 100-Day SMA (1.5745) as economic activity in the U.K. gradually picks up. In turn, we should see the Bank of England continue to endorse a wait-and-see approach in September, and the Monetary Policy Committee may slowly move away from its easing cycle as the new lending program is expected to spark a more robust recovery.

U.S. Dollar: Benefits From Flight To Safety, Rally To Gather Pace

The greenback regained its footing ahead of the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 10,082, and the reserve currency may track higher over the next 24-hours of trading as it benefits from the flight to safety. As the economic docket remains fairly light for the U.S. session, we should see risk sentiment dictate price action across the major currencies, but the short-term rally in the USD looks poised to gather pace over the remainder of the month as the Fed continues to endorse a wait-and-see approach.